Silicon Valley Epicenter Turns to Ballot to End Pension War
(Bloomberg) -- San Jose, California, voters four years ago approved sweeping cuts to retirement benefits that were seen as a model for cities reeling from the soaring debts, only to see police and firefighters successfully challenge key provisions in court. So next week, the electorate will try again.
The Silicon Valley hub will vote on whether to sign off on a settlement with unions that replaces the 2012 ballot measure and puts an end to the legal battle it sparked. Largely sidestepping current employees, the alternative plan increases some benefits in exchange for eliminating retirement health care for new employees. Officials say it would save the city $125 million more over the next three decades.
The outcome underscores the limited power cities have to cut retirement bills, since pensions promised to workers generally receive broad protections under state laws. With about $2 trillion less than they will eventually need, states and cities must pump more money into retirement systems if they can’t reduce their obligations -- a demand that’s triggered credit-rating cuts to Illinois, New Jersey and Chicago.
"You have to be willing to take on the fight and put up with the battles and pay the costs," said former Mayor Chuck Reed, who pushed the 2012 overhaul. "It’s not easy and it’s not necessarily cheap. But it has to be done in order to keep these systems from failure."
San Jose, the tenth-largest U.S. city and home to technology companies including Cisco Systems Inc. and EBay Inc., had a debt of about $2.4 billion to its retirement plans for police, firefighters and other city workers as of June 2015, according to its most recent valuations. San Jose’s tab for retiree costs was $253 million this year, the equivalent of about one-fourth of its general-fund budget.
Moody’s Investors Service ranks San Jose’s general-obligation bonds Aa1, the second-highest grade, citing the city’s strong economy yet high burden from pensions and
retiree health care.
In 2012, as local governments were still reeling from the aftermath of the U.S. recession, San Jose attracted national attention for seeking to roll back pension benefits at the ballot box, despite opposition from public employees. The measure, which passed by a vote of 69 percent, raised retirement ages for new workers, increased the bar for disability payouts and required higher contributions from employees who declined to accept the less valuable plans that new workers were to receive.
The changes prompted a wave of departures from the police department, reducing its staff to about 800 from 1,300 a decade ago. In court, unions succeeded in protecting current employees from the key provisions, though some elements, namely the changes to new hires, were allowed to stand. That saved the city around $40 million a year.
Without next week’s ballot measure, continued litigation could invalidate even those wins, said Mayor Sam Liccardo, who took office in January 2015. As part of the settlement, his administration last year struck an agreement to eliminate health care for new workers after they retire. In return, unions won changes to the retirement age and cost of living raises for the newly hired, compromises the mayor said were needed to attract recruits to the police department.
"If this measure does not pass, then the epitaph for pension reform would read: it destroyed a major city’s police department," the mayor said. "There won’t be another city in the country that will follow our path."
While the 2012 measure had little input from labor, this one has too much, said Pete Constant, a former San Jose city councilman who is now vice president of the Silicon Valley Taxpayers Association, which advocates a smaller role for government and has sued the city over the November ballot measure. The fact that some newly hired workers would qualify for the most lucrative benefits if the measure passes calls into doubt the projected savings, he said.
"We have a greater obligation to current and future taxpayers to make sure that we’re not creating a system that has problems," said Constant. "Not knowing the full cost of implementing this is a significant problem for the city of San Jose and taxpayers."
Union officials, who have raised funds to support the measure, said the do-over shows the perils of failing to come to an agreement outside the courthouse.
"To take this very complex issue and try to sound-bite it and put it in front of the voters, it’s just unfair," said Tom Saggau, who represents San Jose’s police and fire unions. "It was a failed effort, a wrong-headed attempt that should have been done at the negotiating table as opposed to the ballot box."